Public sector net worth

Good morning from New Economy Brief. 

How sustainable are the public finances? This question shapes our political debate in so many ways, and yet there is precious little data that can help us understand the reality, leading to some quite blunt statistics (such as gross debt and deficit numbers) dominating our fiscal debate. 

In fiscal policy, as with many other areas of economics, what matters is what is measured, and, therefore, what is measured really matters. That’s why the decision to add a new public finance measurement, Public Sector Net Worth, is worthy of deeper exploration. 

In this week’s New Economy Brief we explain what this measure is, what it tells us about the UK’s public finances, and how it could be used in the future.

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‍Public Sector Net Worth. Last week the Office for National Statistics (ONS) began measuring Public Sector Net Worth (PSNW) for the first time. This is a broader measure of the state of the UK’s public finances, as it calculates the value of the total assets a government owns, minus its liabilities. Assets include physical assets owned by the state, such as schools, hospitals, roads and other infrastructure, and financial assets such as student loans. Grant Fitzner, the ONS’s Chief Economist, explained that the new PSNW measure “provides a fuller picture of long-term fiscal sustainability and captures the impact of a wider range of government activities”.

• It’s not that simple. Of course, as with many economic statistics, it’s a little bit more complicated than that. There are different ways of measuring the value of assets, and especially of which liabilities are included in the measure, these can skew the statistics and frustrate efforts to make comparisons between different economies.
• Why is this important? Economists have often complained that commentary about the public finances is overly focused on the total debt of the public sector rather than how much it is worth, which gives the government too little incentive to invest in the value of their public services and infrastructure. As the BBC’s review of its own impartiality on fiscal policy recently found, many journalists instinctively believe that all debt is bad, a lack of nuance which could be partially attributable to the paucity of the official statistics.
• The case for investment. The Institute for Public Policy Research’s (IPPR) Carys Roberts and Carsten Jung explain that the idea of PSNW helps to “enshrine in government thinking the notion that public investments should be encouraged if they generate value”. Richard Hughes, now head of the Office for Budget Responsibility (OBR), along with other co-authors from the Resolution Foundation, have previously called for the UK’s fiscal rules to include a PSNW objective “to deliver an improvement in public sector net worth as a share of GDP over five years. This would incentivise prudent investment decisions to address the long-term challenges facing the UK”. Interestingly, their suite of proposed changes to fiscal rules also includes an ‘escape clause’ which recognises the need for more active fiscal policy and the suspension of other rules “if the economic outlook deteriorates significantly”, which could enable fiscal policy to play the lead role in supporting the economy in the event of shocks. An IMF paper has also found that countries with higher PSNW are found to recover faster in the aftermath of recessions and experience shallower economic downturns. 

The value of the UK’s public sector: -£605.8bn. The ONS calculated the UK’s Public Sector Net Worth to be in a deficit of £605.8bn. The Resolution Foundation’s analysis notes that the value of the public sector has declined from -£530bn last year, continuing "a long-term trend of decline in net worth, which has fallen substantially from the surpluses recorded by the ONS pre-financial crisis” and shows that “the country is failing to invest in its future”. 

• Analysis: “Worst of any major economy”. A recent report from the Resolution Foundation’s Economy 2030 Inquiry shows how the UK’s public-sector net worth is “very low” by international standards - only Portugal performs worse (for countries where reliable data exists). They argue that “combining low investment with fairly normal borrowing levels and repeated economic shocks has meant steep declines in public sector net worth…which has fallen by more than 50 per cent of GDP over the past two decades…Had the UK’s levels [of public investment] been at the OECD average over the past two decades, public investment would have been a truly transformational £500 billion higher (in 2022 prices).” Economist Julian Jessop (Fellow of the right-wing think tank, the Institute of Economic Affairs) notes that the UK’s PSNW is “the worst of any major economy” and that including measuring PSNW as part of the government’s fiscal rules “could have broad appeal” as fiscal conservatives hope it would force the government to face up to the cost of longer-term liabilities, such as public sector pensions, and advocates of more expansionary fiscal policy hope “the inclusion of a wider range of assets in the fiscal rules might create more room for governments to borrow to invest… as long as the resulting increase in liabilities is matched by an increase in the value of the assets owned by the public sector.”

What could this enable politically? The primary practical application of PSNW is in its interaction with fiscal rules. Targets based on PSNW rather than debt or deficits could reduce the temptation for the Treasury to cut investment and engage in fire sales of public assets in times of economic downturn. Labour is planning to adopt a PSNW approach to fiscal policy, while stopping short of committing to a new fiscal rule. They argue that a focus on debt has led to “a short-termist mismanagement of the public finances under the Conservatives”, reports Bloomberg’s Philip Aldrick, where “privatizations and asset sales may reduce the debt but have left the government with one of the largest net worth deficits of all OECD members…Labour hopes a full balance sheet rule might also reframe the debate around its plans to borrow to invest in green infrastructure.”

• PSNW and public ownership. In 2019 Labour’s Shadow Chancellor John McDonnell proposed the adoption of a PSNW target to improve the ‘overall balance sheet by the end of the Parliament’. Crucially for Labour at that time, this rule would enable more government borrowing to return privatised utilities into public ownership, as they would then be listed as valuable assets when assessing the public finances.
• The rationale for change. Professor Simon Wren-Lewis has written on how a public sector net worth target would be a more appropriate fiscal rule given the acute need for major green investment, though he has also argued that there needs to be a broader de-emphasis of fiscal targets in favour of a more holistic economic outlook. (See his discussion with Bloomberg’s Stephanie Flanders on fiscal policy challenges during and after the pandemic.) 
• Rules vs principles. Wren-Lewis is not alone in questioning the concept of fiscal rules. The New Economics Foundation (NEF) recommended the government’s ‘fiscal rules’ be replaced with a new framework, including a Fiscal Policy Committee (FPC) housed at the OBR or other third-party institution, appointed by government and parliament and guided by a set of ‘fiscal principles’. The FPC’s mandate would be based on resource constraints, full capacity utilisation, the private sector balance sheet position, and public sector net worth.
• An unsustainable status quo? While the measurement of PSNW may not on its own herald a brave new dawn of fiscal understanding, it is part of a wider drumbeat of dissatisfaction with the current fiscal policy framework which is worth watching. In recent months the current framework of rolling targets based on debt figures has been criticised by a wide range of people and institutions including the NIESR, Resolution Foundation, the IfG’s Jill Rutter and the Times’ Simon Nixon. After many years where debt and deficit figures dominated all political debate in the UK to the exclusion of all else, it is possible that there may be a growing appetite for a new approach.